ANATOMY OF AN IPO

June 7, 2012

Initial public offerings (IPOs) are associated in investors’ minds with enormous profits. These profits, however, tend to be more for the founders of companies and for investment banks rather than for retail investors or even institutional investors. Market observers always call to mind a few “hot” IPOs where the share price provided double-digit returns in a single day.
 
But what happens after the initial excitement? Studies have shown that, in general, investors are better off owning shares of seasoned companies as opposed to new issues through an IPO. While we don’t know for sure why investors overpay for IPOs, research also indicates that investors overweight the probability of extreme growth of newly listed companies and therefore apply too high a value to these shares.*
 
That brings us to the recent Facebook IPO. We don’t know if Facebook is fairly valued or not. We generally believe that the market fairly prices liquidly traded securities and therefore we do not believe we have much edge or insight into the valuation of any one issue. Given our belief that large, liquid stocks are generally fairly priced, and because of the long-term underperformance of IPOs, as a firm, Wealth Enhancement Group did not participate in the Facebook IPO and we advised our clients against participation as well. In general, we advise against participation in any IPO.
 
Not having edge or insight into publicly traded stocks sounds like a bad thing, but it’s actually a good thing. When all market participants are working with the same information, it limits the ability of more-informed market participants to take advantage of less-informed participants, who unfortunately tend to be working savers or retirees. In the case of the Facebook IPO, there have been allegations that not every investor had the same information. According to press reports, certain investment banks changed their forecasts for Facebook and communicated those changes only to institutional clients, leaving individual investors—their retail clients—in the dark. The effect was that those retail clients may have paid more than they would have otherwise been willing to pay for the Facebook shares. While we don’t know yet what happened at Facebook, we do know that the more widely information is disseminated, the better for individual investors, our clients and the functioning of the market as a whole.
 
Wealth Enhancement Group
 
*Ritter, Jay, 1991, The long run performance of IPOs, Journal of Finance 46, 3-q7.

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Our “One and a Half Cents” on the Fourth Quarter – Part Two

January 6, 2011

At Wealth Enhancement Group, financial education has always been a priority and a commitment to our clients and the community. This article summarizes the details of the recent legislation. If you have questions about how these changes impact you personally, we are offering a complimentary 2011 tax planning review for those who are interested.

On December 17, 2010, President Barack Obama signed into law The Reid-McConnell Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. The Act is the result of a compromise struck between President Obama and Republican leaders of the Senate and House of Representatives to temporarily extend unemployment benefits, reduce Social Security taxes, extend the “Bush Tax Cuts,” and make a host of other tax changes.

The Act now extends most of the provisions of two separate tax relief laws, which were set to expire, until the end of 2012. It offers citizens a variety of benefits, primarily in the areas of estate tax and individual income tax.

Individual Income Tax Rates
As part of the Bush Tax Cuts extension, the Act extended the expiration date on income tax rates by an additional two years. The current income tax rates (top federal income tax bracket is 35% and the lowest income tax bracket is 10%) will remain the same for the next two years.

By keeping the rates unchanged, 2010 Roth conversions are more valuable. Individuals can opt for the two-year deferral and no additional costs are incurred.

Long-term capital gains and dividend tax rates stay at 15% if your taxable income is in the 25% tax bracket or higher, or 0% if your taxable income is in the 15% tax bracket or lower.

Estate Tax
Under the new tax revisions, the estate tax rates are simply shortened by the Act at the top marginal rate of 35%. The brackets between 18% and 34% remain exactly the same, and the 35% bracket is imposed as the maximum rate.

The exemption amount has been raised to $5 million per person or $10 million per couple. Exemptions are portable between couples. This amount is indexed for inflation in multiples of $10,000 beginning in 2012. Starting January 1, 2013, the applicable exemption amount will revert back to $1 million as it was scheduled to do under previous legislation. The $5 million exemption amount is also applicable to gift taxes and the generation-skipping transfer tax.

As a result, more Roth IRAs and traditional IRAs will pass estate tax-free, and inherited Roth IRAs will be not only income tax-free but also estate tax-free.

Charitable Contributions
Required minimum distributions (RMD) that have not been met in 2010 can still be taken and allocated as a donation to a specific charity until the end of January 2011. If one does not want to donate the IRA distribution to charity, then the 2010 RMD must be taken by year-end as usual. If it is not timely taken, the 50% penalty on the amount not taken will apply.

The Bottom Line
There are plenty of provisions to the Tax Relief Act, including the extension of charitable IRA distributions and land conservation easements, and these changes provide many tax planning opportunities for individuals.

It is important to remember that the Act is essentially a two-year patch to prevent economic damage from tax provisions that are expiring at an inconvenient time. This will all have to be revisited in two years, when the political party balance in Washington may be very different than it is today.

The national tax provisions can be complicated. At Wealth Enhancement Group, our knowledgeable team of specialists can help you better understand the changes and use them for your long-term financial success.


Our “One and a Half Cents” on the Fourth Quarter – Part One

January 4, 2011

The stock market posted strong gains during the third quarter after rebounding from the low of the year that occurred near the end of the second quarter. The S&P 500 posted an 11% gain for the quarter. The strong gains during the quarter were far from steady. Volatility was high as the S&P 500 moved up and down within a 10% trading range. Cyclical, Mid-Cap, and European stocks fared the best during the quarter:

The highly cyclical Materials, Industrial, and Consumer Discretionary sectors were among the best performers while the legislation-sensitive Financials and Health Care sectors lagged.

According to data from the U.S. Treasury, purchases of U.S. stocks by foreigners in the third quarter of 2010 were likely strong based on the latest data available for July. On average, demand in recent quarters has only been exceeded in the past by the surge in buying around the market peaks in 2000 and 2007.

However, those foreign investors saw almost none of the strong gains in the U.S. stock market translate into their holdings due to the decline in the value of the dollar. The performance of the dollar-denominated S&P 500, when adjusted for the value of the dollar against major trading partners, was relatively flat for the quarter. If foreign investors fear further declines in the dollar, they may restrict their buying of U.S. stocks.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.


Top Ten Year End Tax Ideas – Part Two

December 28, 2010

1. Take some losses. Even though the stock market is up this year, you still might find that some of your portfolio holdings are at a loss. You can sell those assets and deduct up to $3,000 per year against ordinary income. The remainder carries forward for future use indefinitely. The assets must be held in a non-qualified or “taxable” account, as opposed to IRAs or other tax deferred or tax advantaged plans to deduct these losses.

2. Fund an IRA or Roth IRA (depending on which best fits your situation). Don’t wait, start the tax savings now. If you have funds in a savings account, more than likely you are earning a pitiful interest rate that is also taxable. You can put up to $5,000 ($6,000 if age 50 or older) into a Traditional or Roth IRA, which each have their own separate tax advantages until April 15. Certain income limits do apply.

3. Take a distribution from your retirement plan or convert your retirement plan to a Roth IRA. If your income is lower in 2010 than it will be in 2011, you could take a withdrawal and pay tax at a lower rate this year. You could also convert all or a part of a Traditional IRA or other qualified retirement plan to a Roth IRA now and never have to pay tax on those funds again! Restrictions, penalties and taxes may apply. Unless certain criteria is met, Roth IRA owners must be 59 ½ or older and have held the IRA for 5 years before tax-free withdrawals are permitted. Remember that for the funds you convert to a Roth IRA in 2010, you have the option of electing to spread the taxable income into 2011 and 2012.

4. Get educated! No matter what your age is, now is a good time to look at continuing your education. The American Opportunity Credit provides a tax credit as much $2,500 on the first $4,000 of qualifying tuition and other education expenses. Pay your spring semester tuition or purchase your books before December 31 and you could receive the benefit of extra tax credits (not a deduction!) for this year. This credit is scheduled to change to be less favorable in 2011, so try and maximize the benefits under this year’s rules if possible.

5. Fix-up your house. Making energy efficient improvements (windows, doors, furnaces and much more) and receive a 30 percent tax credit on the first $5,000 of qualifying property purchases (a $1,500 credit). These improvements must be installed by December 31 in order to count for the credit in 2010. Remember that if you already used up all of your credit in 2009, you are ineligible for tax benefits in 2010. If you only used part of the credit, you can still make improvements and take advantage of the unused portion yet this year.

These are simply brief overviews of some of the tax items that you should not only be thinking about, but also trying to take advantage of. There are many favorable tax provisions that will only be in place for a short while. Make sure to call your financial advisor.


Catalysts on the Horizon – Part 3

September 23, 2010

5. The fourth quarter of mid-term election years is almost always favorable for stocks. The market’s reaction to mid-term elections, as uncertainty fades, has almost always been positive, with fourth quarter gains averaging 8% in mid-term election years. So far, the stock market performance in 2010 has tracked the typical pattern for U.S. stocks in mid-term election years, albeit with a bit more than the usual volatility.

6. If history is any guide, the disappointingly soft economic data over the past few months may soon begin to firm. Looking back over the past 60 years, about one year after the start of every recovery a soft spot emerges. Some closely watched indicators of growth are likely to be near the bottom of their typical soft spot-driven decline and poised for a rebound. As the data begins to firm later this year, the typical pattern of recovery may continue to unfold as it did in the post-recession recovery years of 2003 and 2004 when a late year rally in 2004 resulted in gains for the year.
Unfortunately, all of these potential catalysts are a month or more away while the economic data continues to disappoint.

The volatility that has defined this year is likely to continue with ongoing losses to be recouped by a late-year rally. In the meantime, we continue to find yield-producing investments attractive.


The Whole Picture

October 20, 2009

Do you have the diversification you need to keep your portfolio on track even when the stock market falters? The first step is to sit down with your financial advisor to take a closer look at your holdings to make sure your portfolio is well enough diversified to stand the test of time.

Does your investment portfolio have the diversification you need to sail smoothly through the ups and downs of the market? True diversification means more than spreading your assets around to a handful of stocks. It means putting assets into a variety of different types of investments beyond the stock market.

The younger you are the more aggressive you can be. While no strategy assures success or protects against loss, a portfolio heavily weighted in stocks might make sense for investors in their 20s and 30s. But the closer you are to retirement, the more important it is to spread some of your money to other types of investments.

Make sure you have the diversification you need to keep your portfolio on track even when the stock market falters, The first step is to sit down with your financial advisor to take a closer look at your holdings to make sure your portfolio is well enough diversified to stand the test of time.


Vacation Properties and Income – Part 2

September 14, 2009

Another way for retirees to generate income from a vacation home is to sell it. By using the federal capital gains exclusion in conjunction with the sale of your primary residence, you can potentially realize tax-free income. Here’s how it works. The basic capital gains exclusion rules state that you must have owned and used the home as your primary residence for at least two years out of the five-year period ending on the date of the sale. If you are married, the full $500,000 exclusion ($250,000 for single homeowners) is available as long as one or both of you satisfies the ownership test (two years) and you both satisfy the use test (primary residence).